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We Need to Tax Carbon Emissions, Not Subsidise Fossil Fuels

The International Energy Agency (IEA) made headlines recently by concluding that fossil fuels received far more global subsidies than renewable energy in 2010. However, it appears that the IEA survey only included data from the countries with the largest fossil fuel subsidies, which are mainly developing countries whose economies largely depend on fossil fuel production. National Geographic’s The Great Energy Challenge also includes fossil fuel subsidy data from developed countries (Figure 1), bringing the total global value close to $500 billion for 2010.

Figure 1: Global fossil fuel subsidies in billions of dollars per country from National Geographic.

Bear in mind that exactly what is defined as a “subsidy” can be rather subjective, so these are just rough estimates.

It’s worth noting that this trend is changing. For example, in the USA in 2011, fossil fuel subsidies in the form of tax breaks were down to $2.5 billion while renewable energy and energy efficiency programs received $16 billion in subsidies. Even many developing countries like Iran (with the largest orange circle in Figure 1 at over $80 billion in 2010 fossil fuel subsidies) dramatically reducing their subsidizing of fossil fuels (in 2011 Iran’s subsidies were down to $20 to $30 billion).

Nevertheless, despite the movement in the right direction, global fossil fuel subsidies are still much higher than renewable energy subsidies, despite the fact that fossil fuels and associated technologies have been established for decades to centuries. Fossil fuels also receive another massive subsidy which is rarely taken into account in these types of calculations – carbon emissions.

It’s very challenging to quantify the total dollar impact of these changes, but economists try to estimate the economic damage done by a each ton of carbon (or carbon dioxide) emissions, which they have termed the “social cost of carbon” (SCC). SCC is effectively an estimate of the direct effects of carbon emissions on the economy, and takes into consideration such factors as net agricultural productivity loss, human health effects, property damages from sea level rise, and changes in ecosystem services.

Global CO2 emissions from fossil fuels in 2011 totalled 31.6 billion tons. Given the SCC range of $5 to $68 per ton of CO2, those emissions correspond to a cost of $158 billion to $2.1 trillion per year, globally – roughly $23 to $300 per person. Note that the IEA and National Geographic listed global fossil fuel subisides at $400 to $500 billion. The central estimate of the social cost of carbon emissions is roughly twice that total.

These carbon emissions may reasonably be considered a subsidy because they impose various costs on society (on agricultural productivity, property damage, human health, etc.), but since most countries don’t yet put a price on carbon emissions, these costs are not reflected in the fossil fuel market price. Rather than fossil fuel producers and consumers paying these costs, society as a whole picks up the tab. Therefore, fossil fuel prices are kept artificially low (Figure 2), which is generally the purpose of subsidies.

Figure 3: Top Frame - National average per capita CO2 emissions based on OECD/IEA 2006 national CO2 emissions (OECD/IEA, 2008) and UNPD 2006 national population size (UNPD, 2007). Bottom Frame: Global Climate Demography Vulnerability Index. Red corresponds to more vulnerable regions, blue to less vulnerable regions. White areas corresponds to regions with little or no population (Samson et al 2011).

Carbon – the Forgotten Fossil Fuel Subsidy

It’s rather remarkable that everyone tends to overlook this immense fossil fuel subsidy, which amounts to somewhere in the ballpark of $1 trillion per year at present, globally. It’s certainly a difficult figure to quantify with a large possible range of values, but it’s also a huge cost which fossil fuel producers and consumers do not directly pay. While the market price of fossil fuels remains artificially low, we all pick up the tab to the tune of approximately $150 per person per year, on average, though those costs are unevenly distributed. However, Economics 101 says that the people who benefit from those emissions (fossil fuel consumers) should be the ones paying their cost through a price on carbon emissions.

Climate contrarians in particular tend to neglect this huge fossil fuel subsidy in two main ways. First, they claim that developing nations need “cheap” energy (a favorite argument of John Christy, for example), when fossil fuel energy is not actually cheap, and in fact poorer nations tend to pay the lion’s share of the associated climate costs (Figure 3). Second, they claim that it will be cheaper to adapt to climate change than to mitigate carbon emissions (i.e. Monckton,Michaels and Cato, and the CEO of ExxonMobil have recently made this argument). In this context, “adaptation” means continuing the economic drain of these hundreds of billions to trillions of dollars of fossil fuel subsidies every year, which is several times higher than the cost of climate mitigation.

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Sure thing, a taxing policy fiat by government, is always a measure to success...

Yes, demand that the state act, though it's police power all to save the environment...

Mel Tisdale on July 17 2012 said:

If I understand Hans Nieder correctly (and it is a big 'if'), he would prefer to leave the care of the environment in the hands of the free market, and in particular have the likes of Rex Tillerson, CEO Exxon Mobil - a captain of industry, make sure all is well, much like the way the passengers on the Titanic trusted the captain of the ship.

Let me remind Hans Nielder that Rex Tillerson thinks climate change is all down to engineering and we can learn to adapt. Anyone who makes that statement simply has not studied climate change. Unless they think killing off a large portion of the human population is an acceptable adaptation strategy, of course. That Rex Tillerson's own offspring, and in turn their offspring, might well be among those sacrificed on the altar of such free market led adaptation gives us the measure of the man. Perhaps he, and those like him, think that they will be able to buy their way out of the problem. Let me remind them of Bob Dylan’s Masters of War. In particular:

Let me ask you one question
Is your money that good
Will it buy you forgiveness
Do you think that it could

Rex Tillerson, and Hans Nielder for that matter, would do well to understand that Old Mother Nature's laws are immutable. If we carry on as we are, i.e. making precious little change to our CO2 production, then Old Mother Nature will just turn up the thermostat. She doesn't need us, but we surely need her. We have seen this summer a lot of record breaking weather and which is quite likely due in whole, or in part, to climate change, seeing as the computer models predict an increase in the frequency and magnitude of extreme weather events like those just experienced.

Those who today can be classed as deniers of climate change are going to face some very hard questions from their families when climate change really starts to bite. And some nations that have been beacons of inactivity on the matter are also going to face some hard questions from the global community. Those nations will certainly be expected to accommodate a sizeable proportion of the climate refugees that will have been driven from their homes as a result of the pollution those nations did not reduce, yet could so easily have.

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